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Friday, January 27, 2012 - 16:47

US Tsy: New HAMP Mtg Mod Prgm Includes GSE Principal Reductns


WASHINGTON (MNI) - The Obama Administration Friday announced it is expanding its flagship mortgage modification program and will now encourage lenders to reduce the principal loan balance for Fannie Mae and Freddie Mac loans.

The announcement comes just three days after President Obama said he would do more to support the struggling housing market and two days after Federal Reserve Chairman Ben Bernanke said housing is holding back the economic recovery.

Assistant Secretary for Financial Stability Timothy Massad in a blog post Friday outlined the changes to HAMP -- including extending the end-date by one year and refocusing on principal reductions.

Massad said Treasury notified the Federal Housing Finance Agency, the regulator for Fannie Mae and Freddie Mac, that they will pay principal reduction incentives to the GSEs if they allow servicers to forgive principal -- if done in conjunction with a HAMP modification.

Massad also said Treasury will triple the incentives for HAMP principal reduction modifications by paying from 18 to 63 cents on the dollar, depending on how much the loan-to-value ratio is reduced.

Prior to Friday's announcement, only 36,000 HAMP principal reductions had been done since the start of HAMP, however, that number is likely to increase by making GSE loans eligible.

In a letter that was sent a week ago by FHFA Acting Director Edward DeMarco to members of Congress, DeMarco said the FHFA did not allow principal reductions for GSE loans because under the HAMP net present value test, principal forbearance, or reducing the monthly mortgage payment but not the outstanding balance, provided a higher cash flow to taxpayers.

"Forbearance achieves marginally lower losses for the taxpayer than forgiveness, although both forgiveness and forbearance reduce the borrower's payment to the same affordable level," DeMarco said in his letter.

However, in his letter DeMarco added, "FHFA would reconsider its conclusions if other funds become available and if the availability of other funds is at a level that would change the analysis to indicate potential savings to the taxpayers."

The Federal Reserve earlier this month put out a White Paper which discussed principal reductions and Fed Chairman Ben Bernanke in a press conference Wednesday said it "seems very likely principal forgiveness could be helpful, depending on how it's structured, in reducing delinquencies."

Massad said the Treasury also took other measures to expand the HAMP program, including allowing higher debt-to-income ratios for borrowers who would have qualified if it weren't for a second lien as well as the inclusion of rental properties.

"Treasury will expand eligibility to include properties that are currently occupied by a tenant as well as vacant properties which the borrower intends to rent," Massad said in his blog post.

"Single family homes are an important source of affordable rental housing, and foreclosure of investor-owned homes has disproportionate negative effects on low- and moderate-income renters," Massad continued.

The announcement Friday marks the second time the oft criticized HAMP program has been revamped. To date, roughly 900,000 permanent mortgage modifications have been conducted -- well short of the originally stated goal of 2-3 million that was set when the program was originally introduced.

** Market News International Washington Bureau: 202-371-2121 **

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